So many people have no idea they’re trading in a circuit breaker stock market. That boggles my mind. This is something you need to know.
Don’t let the market take you by surprise. The more you learn about your environment, the better you can function in it.
That’s what this is all about. Learn a little bit every day, and, after a while, you’ll start to connect the dots.
I’ve been trading the same patterns for 20+ years because early on in my career I took the time to study every day. After a while, I started to make connections. The idea is to expose yourself to as much information as possible to prepare.
Sometimes you’ll get caught off guard … It happens. But if you get stuck in a halt and panic, your account could suffer. Don’t let your emotions drive your trading.
Let me help you understand the circuit breaker stock market better…
Table of Contents
- 1 What Is a Circuit Breaker in the Stock Market?
- 2 How Does a Circuit Breaker Work in the Stock Market?
- 3 What Is the Circuit Breaker Rule?
- 4 History of the Circuit Breaker in the Stock Market
- 5 Circuit Breaker Stock Market Critiques
- 6 Circuit Breaker Stock Market: Frequently Asked Questions
- 7 The Bottom Line on the Circuit Breaker Stock Market
What Is a Circuit Breaker in the Stock Market?
Stock market circuit breakers are meant to stop panic selling and lower excess volatility.
Check out my NO-COST “Volatility Survival Guide” for guidance on that…
Market Wide Circuit Breakers (MWCBs) follow the S&P 500. That means if the index drops by too many percentage points, trading on certain U.S. exchanges halts.
You need to understand this because it affects every trader in the market. If an MWCB activates, your open positions will halt even if the stock you’re playing isn’t volatile.
A trading pause gives people time to digest new information and check their emotions.
That’s why circuit breakers exist.
Even the best traders let their emotions get the best of them sometimes. A few minutes to think is all some traders need. It could be the difference between a market crash and a rebound.
In extreme cases — if the S&P 500 drops too much — trading halts for the rest of the day. After-hours trading is also canceled.
The bottom line: if you’re in a stock and trading halts, you must know what’s going on. That’s how you make the best decision once trading resumes.
How Does a Circuit Breaker Work in the Stock Market?
Trading stocks that make big moves can seem attractive. But big potential profits mean big losses lurk just out of sight.
Circuit breakers halt those losses and lower volatility. Let’s break it down…
This is the first line of defense. A level 1 circuit breaker activates when the S&P drops 7% or more. It’s measured from the previous day’s closing price.
Trading will halt for 15 minutes … unless it’s after 3:25 p.m. Eastern because there’s usually volatility in the last 35 minutes of the trading day.
If trading resumes but the S&P continues to drop to 13% or more, trading halts for another 15 minutes. Once again, if it happens after 3:25 p.m. Eastern, everything continues as normal.
This is code red. If the S&P 500 drops 20% or more, trading halts for the rest of the day. Level 3 circuit breakers can activate at all hours of the trading day.
What Is the Circuit Breaker Rule?
It’s also known as the Limit-Up Limit-Down (LULD) rule. Just like there are MWCBs, there are also circuit breakers for individual stocks.
See how circuit breakers are a big part of our current trading environment? This is a unique market historically. You must know what you’re up against.
There’s a difference between MWCBs and the LULD, so let’s go over it …
The biggest difference you need to know is that MWCBs only halt trading for volatile downward price action, but LULDs halt stocks going down or up.
The limits are different too.
In general, trading halts when stocks surge or decline past 5%, 10%, and 20% limits. Levels can vary based on what you’re trading.
The percentages are doubled in the first 15 minutes and the last 25 minutes of the day because trading is usually more volatile at the beginning and end of the trading day.
We calculate the percent loss from the average price of the last five minutes. The stock has to trade outside of the percent limits for 15 seconds to trigger the halt.
Halts usually last five minutes, but they could last 10. It depends on the situation.
Curious about how this all started? It’s pretty interesting. Check it out…
History of the Circuit Breaker in the Stock Market
On October 19, 1987, the Dow Jones Industrial Average (DJIA) lost 500 points and fell 22%. It’s still the largest percentage loss in U.S. stock market history.
It was a result of world politics at the time and the rise of computer trading. Starting in Hong Kong, the massive sell-off impacted markets around the world.
After that, the crash regulators agreed the markets needed a system to protect against huge drops like that happening again.
It hasn’t been perfect. It evolved after the limits failed to stop the flash crash of 2010. That’s when the market fell 9% in 10 minutes.
The MWCB used to follow the DJIA, but it moved to the S&P 500 in April 2013. Regulators created the LULD rule at this time too.
Notice how the environment changes over time. Never get too comfortable. Regulations can change at any time and you must be up to date.
Since 2013, trading has halted market-wide only a few times.
When Was the Last Circuit Breaker?
The last time an MWCB halted trading was March 18, 2020. The decline was mostly because of the pandemic. It’s no secret that lockdowns and uncertainty were hard on the stock market in 2020, especially in the beginning.
It was a level 1 circuit breaker. Trading halted for 15 minutes in the early afternoon then resumed.
How Many Circuit Breakers Have Happened in the U.S.?
There have been multiple circuit breaker triggers in the U.S. Some are market-wide, but most are individual and happen more often.
One of the most notable was on October 17, 1997. Back then there were only two levels of circuit breakers. One halted trading for 30 minutes if the DJIA dropped 350 points in a day. The second halted trading for the rest of the day after another 200-point drop.
At the time, a level 1 circuit breaker trigger was only a 4.5% drop. Some felt the halt was unnecessary considering the low percentage loss.
Since then the MWCB rules have changed. They started following the S&P 500 and moved to a percentage-based system instead of points.
March 2020 showed us the true power of the trading halt. On four separate days, the market halted trading for 15 minutes. All due to growing pandemic concerns.
All four halts were level 1 circuit breakers. Who knows how far the market could have fallen without the pause in trading.
This is why I say it’s good to study the past. It helps you understand how the circuit breaker stock market came to be. Anyone can read a book on rules. But if you really want to understand this environment, study its history. Try to learn why we have circuit breakers.
The MWCBs are in effect to lower volatility, but some traders are less trustworthy…
Circuit Breaker Stock Market Critiques
Some people think circuit breaker stock markets do more harm than good. They argue that instead of reducing volatility, they’re creating it.
By halting trading, orders pile up … until the market opens again. Then the market surges with a bunch of orders placed during the halt.
I’ve seen Level 2 quotes when orders pile up like that. It’s a huge landslide effect. Try finding a stock that’s halted and watch what the Level 2 does when trading resumes. That’s a great learning opportunity.
If you get stuck in a stock, you need to know what’s going on so that when the halt lifts, you can make the best decision to stay safe.
Check out my “Learn Level 2” DVD to learn more about this great trading tool. I use it for every trade…
Circuit Breaker Stock Market: Frequently Asked Questions
What Is a Circuit Breaker?
It’s a regulatory measure that attempts to decrease volatility and panic selling in the stock market. There are market-wide circuit breakers and breakers for individual stocks. If volatility increases past a certain level, trading halts.
Do Individual Stocks Have Circuit Breakers?
Yes, and unlike MWCBs, individual stocks can halt up and down. Too big of a price swing will invoke the limit-up limit-down rule, and trading halts for 5 to 10 minutes.
Does Nasdaq Have Circuit Breakers?
Yes, the Nasdaq has MWCBs. Most big exchanges do. Since Black Monday, regulators are convinced we need safety measures to protect the markets.
The Bottom Line on the Circuit Breaker Stock Market
I’m glad you took the time to read about circuit breakers. Traders that know more about their environment are set up for success.
You should try to learn more every day. That’s how the best got where they are.
Stock trading is hard. It takes a lot of time and dedication.
Take it from me. I realize I’m a better teacher than a trader. For a little over a decade now, I’ve been teaching others how to trade stocks.
The Trading Challenge is not for the faint of heart. All my millionaire students spent months and years studying before finding their stride. If you think it’s for you, apply … but I don’t accept everyone. You have to show me you can do the work.
If you’ve read this far, you might have what it takes.
I hope this post helps you if you ever get stuck in a halted stock again. As volatility goes up, we could see more of a circuit breaker stock market. And if it happens to you, remember to find out why the stock you’re trading halted and keep your expectations realistic. Emotions just mess with your head.
What do you think about circuit breakers and the circuit breaker stock market? Have you gotten stuck in a halted stock before? Comment below. I love to hear from all my readers!